Canadian trial finds blockchain not ready for bank settlements

TORONTO (Reuters) - Distributed ledger technology, a new approach for processing transactions that is being widely tested across the financial industry, is not yet mature enough to run a national interbank payment settlement system, the Bank of Canada said on Thursday.

A sign is pictured outside the Bank of Canada building in Ottawa, Ontario, Canada, May 23, 2017. REUTERS/Chris Wattie

The bank reached that conclusion after a closely watched year-long trial code-named “Jasper,” which sought to determine whether the technology, known as DLT, could be used to improve the performance of Canada’s wholesale interbank payment system.

“A pure stand-alone DLT wholesale payment system is unlikely to match the net benefits of a centralized wholesale payment system,” the Bank said in a report.

Jasper is among dozens of fledgling efforts by financial institutions around the globe to find ways to use DLT, including blockchains at the heart of digital currencies, to boost efficiency, transparency and security of financial transactions. Investors have pumped billions of dollars into blockchain startups looking for ways to revolutionize the financial system.

DLT systems post records of data or transactions on multiple computers connected through a common network, eliminating the need to rely on a single, central authority.

Jasper tested two distributed ledger platforms. Phase one was built on “Ethereum,” which the bank said made the system more resilient but would be costly and raised key issues including privacy. Phase two, which began in December, used “Corda,” which addressed those concerns, but made the system less resilient. Corda was developed by the R3 fintech consortium, which includes Canada’s largest financial institutions.

Payments Canada, which runs the national interbank payment system that clears more than C$175 billion ($130 billion) a day, helped conduct the trial with assistance from Canada’s largest banks.

“DLT is probably not going to push the current systems out of the way,” Bank of Canada’s Grahame Johnson said at a presentation on Jasper in Toronto. “But it did open up a whole bunch of avenues for more work.”

The bank said that DLT-based interbank payment systems had the potential to facilitate interaction with other parts of the financial infrastructure and to lower costs.

It said it might test such systems with other asset classes besides cash, or by integrating them with other domestic or international distributed ledger systems.

“Blockchain is not a solution to every problem,” said Christian Catalini, an assistant professor at MIT’s Sloan School of Management. “The potential here is in the future — we’re talking five or more years.”